Sovereign risk outlook undermined

20 Jan 2017

Africa

Cameroon

Creating a Resilient Organisation

Cameroon: Sovereign risk outlook undermined

Parliament on 8 December approved the 2017 budget, which provides for expenditure of CFA 4,373bn (USD 6.9bn), up 3% from the 2016 budget. State finances have come under growing pressure since 2015 amid the downturn in global oil prices and security challenges in the north. The IMF projects that growth will slow to 4.8% in 2016 and 4.2% in 2017, down from above 5% in the last few years.

Austerity measures unlikely

The government is unlikely to introduce far-reaching austerity measures in the next two years. After spending increases of more than 10% over the last two years, the stabilisation of planned expenditures in 2017 signals a more prudent fiscal policy. The budget is based on conservative estimates for the oil price (USD 40 per barrel) and the CFA franc exchange rate, and does not plan further increases in public investment. However, with the 2018 presidential and legislative elections approaching, the government is reluctant to go further and introduce more stringent measures to narrow the deficit. It is unlikely to depart from its ambitious investment programme, designed to culminate in a series of tangible infrastructure achievements inaugurated before the polls. Likewise, it will also resist calls from the IMF to enter into a financial assistance programme, which would require budget cutbacks and politically unpopular reforms to state-owned entities.

Chronic weaknesses in public finance management and under-performance by state-owned companies will derail budget execution. The pre-election context will likely undermine efforts to bring recurrent expenditures under control and create pressure to fast-track infrastructure projects at the expense of adequate controls on the quality of spending. Meanwhile, the state routinely accumulates arrears in the form of foregone tax revenues from state-owned entities riven by mismanagement and overstaffing. Although revenue targets do not appear overly ambitious, spending overruns are therefore likely in 2017 and 2018, leading to further debt accumulation.

Although the risk of outright sovereign default remains limited in the short term, Cameroon’s financial difficulties will have adverse consequences for private sector investments. Cameroon has a more diversified economy than its oil-dependent Central African neighbours and has not faced the same financing strains. The country has not used the full proceeds of its first Eurobond issued in late 2015 and will remain able to tap regional markets to service its debt obligations. However, rapidly rising debt levels will gradually increase the burden of debt servicing in 2017-18, likely delaying the execution of certain budgeted projects. The state’s increasing recourse to commercial banks to finance its deficit will also place an increasing burden on the relatively shallow domestic banking system. This is likely to reduce the availability of credit on favourable terms to private companies.

What to watch

The disappointing results of Cameroon’s debut Eurobond sale in late 2015 – which attracted only half of the expected CFA 750bn (USD 1.1bn) and was sold at a higher-than-planned 9.75% interest rate – make it unlikely that the government will seek to tap foreign currency debt markets again in the coming months. Instead, the government will continue to use the regional bond market to cover its financing needs. It is currently in negotiations with a consortium of regional banks to raise a five-year, CFA 150bn (USD 240m) bond.

The IMF is likely to communicate the findings of its November visit to the country in the coming weeks. The government’s response will provide an indication of its attitude to fiscal reform. Discussions reportedly centred on the country’s potential return to an IMF assistance programme. However, there is strong internal resistance to such a move, which would require reforms to public finance management and spending cuts that many government officials deem unnecessary and politically costly.

Outlook

Public finances will remain precarious in the next two years, fuelling investor concerns about longer-term sustainability. Debt is projected to exceed 40% of GDP by 2020, more than twice its level in 2013. The government will continue to draw on external financing on non-concessional terms to cover its financing needs, driving up the costs of debt servicing.